Has Golden Star Resources Ltd. (USA) (GSS) Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock and then decide whether Golden Star Resources Ltd. (USA) (NYSEAMEX:GSS) fits the bill.

Golden Star Resources Ltd. (USA) (NYSEAMEX:GSS)The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let’s take a closer look at Golden Star Resources.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 30.2% Pass
1-year revenue growth > 12% 13.5% Pass
Margins Gross margin > 35% 10.3% Fail
Net margin > 15% (2.2%) Fail
Balance sheet Debt to equity < 50% 39.5% Pass
Current ratio > 1.3 1.65 Pass
Opportunities Return on equity > 15% (2.5%) Fail
Valuation Normalized P/E < 20 40.01 Fail
Dividends Current yield > 2% 0% Fail
5-year dividend growth > 10% 0% Fail
Total score 4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Golden Star Resources last year, the company gained back the point it lost from 2011 to 2012. Revenue increased for the mining company, but the stock didn’t perform well, falling 20% over the past year.

Golden Star has faced a tough year, as pressures throughout the mining industry have hurt small companies. With the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) down almost 40% over the past year, few small miners have avoided the sting of higher costs and disruptions that have caused companies across the industry to underperform the price of gold bullion.

But looking forward, things may be turning around for Golden Star. The company’s gold production rose 12% in 2012, with fourth-quarter growth of 31%. The company expects production levels to remain steady in 2013, and with new management on board, Golden Star hopes to push forward with new strategic moves to bolster growth.

Still, the big challenge for the company is in its high cash operating costs, which it expects to fall within the range of $1,040 to $1,100 per ounce. By contrast, low-cost miners Yamana Gold Inc. (USA) (NYSE:AUY) and Goldcorp Inc. (USA) (NYSE:GG) can better handle volatility in gold prices and production, as their cost structure gives them an added margin of safety.

Find out more about low-cost producer Goldcorp by reading our premium research report on the miner. Fool mining expert Christopher Barker shares his view about what makes Goldcorp a smart buy at these levels. Don’t wait; click here to get your report instantly.

For Golden Star to improve, it needs its Wassa mine in Ghana to match up to the increases the company recently put on its proven and probable reserves. Moreover, cutting costs to boost margins will be a key component of Golden Star’s success if it wants to move closer to perfection in the years ahead.

The article Has Golden Star Resources Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned.

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